Fitch Ratings has cut its projection for India’s real GDP growth in 2021-22 to 10%, from 12.8%, citing a slower recovery due to renewed COVID-19 restrictions and warned that medium-term growth hopes of about 6.5% could suffer if business and consumer activity were scarred from the pandemic.
The ratings agency also warned that banks’ asset quality challenges have increased and will remain under threat due to mobility restrictions, medical exigencies and rising job losses, with MSME and retail loans to low- and moderate-income borrowers most likely at risk.
“Localised lockdowns during the second wave kept economic activity from stalling to levels similar to those during 2020 (Q1 2020-21 real GDP growth: -24.4%), but disruption in several key business centres has slowed the recovery and dented our expectations of a rebound to pre-pandemic levels by 2021-22,” the agency said in a note on Indian banks. “Our moderately worse 2021 outlook for Indian banks factors in muted prospects for new business due to our expectation of weak corporate and consumer confidence, banks' continuing high-risk aversion and below-trend credit demand.There is a risk that India's medium-term growth (Fitch estimate: about 6.5%) could suffer if business and consumer activity were to experience scarring from the COVID-19 pandemic,” it added.
Regular lending could suffer due to banks’ risk-aversion despite the continuing relief measures giving them some relief from near-term stress.
“Fitch expects banks’ exposure to stressed MSME and retail borrowers to rise further with the increasing relief outlay..., and is likely to compel banks — especially state-owned ones — to slow regular lending in the absence of adequate core capital cushions and weak contingency buffers. Fitch expects [and] impaired loans to peak after 2022-23 since stress is likely to manifest from this pool over a fairly protracted time frame,” the agency stressed.
“Capital requirements will probably remain high over the medium term once the COVID-19 related stress starts to manifest. State banks may be left with no choice but to limit new lending to conserve capital if sufficient recapitalisation does not occur,” the agency said, noting that the government continues to drip-feed state-owned banks underlining the sovereign’s fiscal constraints.
Stating that rapid vaccination could support a sustainable revival in business and consumer confidence, the report underlined that economic recovery would otherwise remain vulnerable to further waves and lockdowns. While regulatory relief measures have deferred banks’ asset-quality issues for now, their medium-term performance will be dented without a meaningful recovery, Fitch Ratings emphasised.
“The low vaccination rate makes India vulnerable to further waves of the pandemic; only 4.7% of its 1.37 billion population was fully vaccinated as of 5 July 2021…These risks played out recently when active new COVID-19 infections reached in excess of 400,000 a day in late April 2021, against 9,300 in mid-February 2021. The pace of infection has slowed since mid-May but daily new cases are still well above the previous low,” it said.
